Australia Enters New Phase of Mining Boom: Strategist

Yolande Chee|Assistant Producer, CNBC Asia

Thursday, 6 Sep 2012 | 2:30 AM ETCNBC.com

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Australia’s mining boom isn’t over like some market bears have suggested, but is instead moving into the next phase of the cycle, according to Martin Whetton, Interest Rate Strategist for Australia and New Zealand at Nomura.

Carla Gottgens | Bloomberg | Getty Images

A Citic Pacific safety hat at the company's Sino Iron project in Karratha, Western Australia.

Doubts over the outlook of the industry heightened this week after Fortescue Metals Group announced on Tuesday plans to cut jobs, sell assets and delay expansion plans as iron ore prices tumbledto three-year lows. The news triggered a selloff in shares of the world’s fourth largest iron ore producer, which slumped over 15 percent in the past three days.

Fortescue’s announcement comes on the back of the shelving of major mining project such as BHP Billiton’s Olympic Dam expansion and Port Hedland outer harbor expansion in recent weeks.

Even as investment in the industry is slowing, Whetton argues that the next phase of the resources boom has already begun. He describes this as the “exports phase,” where commodity exports, rather than investments, are the main source of Australia’s growth.

Whetton explains that the main source of Australia’s resource growth in recent years has been in project investments, with over A$200 billion ($204 billion) worth of resource projects currently in development. Once these projects are complete, private business investment will moderate, but exports will soar.

“These new projects should start to boost exports. Moreover, a reduction in capital expenditures will likely lead to a moderation in imports. As a result, net exports are expected to become a main source of growth once the investment boom is over.”

Australia has about two or three years left in the “investment phase”, Whetton estimates, while the “export phase” has already started, particularly in the iron ore sector. He believes that iron ore exports have kept Australia’s trade balance in surplus in recent years.

Prices of resources from copper to oil to iron ore have slumped in recent months as investors shunned risk assets and on concerns of shrinking demand from China, which consumes the bulk of Australia’s commodity exports. As a result, there has been increasing chatter about the end of the country’s mining boom, which has been the engine room of the country’s growth. Nomura estimates that the mining sector contributed 20 percent to Australia’s growth in the past year.

The government has been playing down the concerns. Earlier this week, Prime Minister Julia Gillard sought to reassure investors, saying that reports of a demise of the mining sector have been exaggerated. The sentiment was echoed by Deputy Prime Minister and Treasurer Wayne Swan on Wednesday.

“We have seen some recent falls in commodity prices, sustained high [Australian] dollar and this has weighed on some investment decisions particularly for early stage projects. But none of these diminish any of the investment that has already occurred or the $260 billion [worth of investment] already committed in the advanced stage pipeline,” he said.

Swan adds that the benefits of this investment phase will lift the long-term capacity of the Australian economy, and allow for a large lift in export volumes.

The Australia’s economy enjoyed a fairly robust second quarter, recording a 3.7 percent GDP growth from the year before, government data showed on Wednesday. But the second half outlook remains cloudy, with a China slowdown and further falls in commodity prices among the biggest threats to the economy.

LNG Potential to Surpass Iron Ore

While question marks hover over the iron ore sector, Whetton says liquefied natural gas (LNG) is poised to overtake iron ore as Australia’s top export earner before the start of the next decade.

“We think by 2020 LNG is going to surpass iron ore in terms of its export importance to Australia. And they’re very big numbers and in fact when you look at those investment numbers, LNG is one area where we’re not seeing any paring back.”

There is currently over A$175 billion worth of project investments committed to the LNG sector in Australia, and Whetton adds that unlike iron ore, the growth in LNG exports is not dependent on China. He says that Japan, and Korea will be the biggest customers of Australia’s LNG.